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After GDP falls - are we headed for Brecession?

Ed Monk

Ed Monk - Fidelity Personal Investing

A surprise fall in GDP last week has investors wondering whether the UK economy is already in recession.

After GDP falls - are we headed for Brecession?

UK GDP growth was -0.2% in the second three months of 2019, according to the first reading of growth data from the Office for National Statistics. Forecasts had been for a zero reading.

It immediately raised speculation that the UK was entering - or perhaps had even already entered - recession. Remember, a recession is widely defined as being two consecutive quarters of negative growth. So should the next quarter also produce a negative figure when the ONS reports again later this year, the UK will have a brand new recession to contend with.

The news sparked predictable rows over the cause of the slowdown, and in particular whether the situation has been made worse by the UK’s departure from the EU. Was Brexit causing Brecession?

Before answering that that it should be first borne in mind that one reading of GDP does not a recession make. Last week’s was the first of three readings of second quarter GDP (still following?) That’s important because it was made using only around 40% of the data that will eventually contribute to the growth figure. The rest will come in the second and third readings that will follow in the next two months. The first reading for a quarter is often modified when new data comes out.

But assuming the 0.2% fall stands, what chance is there that the third quarter reading will also be negative?

Many economists have predicted that growth will now bounce back, on the basis that the second quarter was adversely affected by stockpiling in the first quarter in preparation of the original Brexit date of March 29. Businesses bought in advance of that moment and then had surpluses after Brexit was delayed, effectively pulling growth forward from the second quarter into the first. Additionally, some manufacturers had scheduled routine factory closures for April so as to be less affected by any disruption arising from the UK legally exiting the EU.

Take these factors out of the equation, the forecasters say, and the UK is still just about growing.

Whether the definition of a recession is met or not, what role has Brexit played in the slowdown? Most opinions were split on political grounds, with opponents of a hard Brexit arguing it is dragging the economy down and Leave supporters pointing to the fact that the UK is not alone in seeing growth slow.

There’s no doubt that the global economy is slowing and the UK is bound to feel the effect of that, Brexit or no Brexit. But it’s also true that the UK economy has been impacted in a negative way by Brexit, even if the worst outcomes of ‘Project Fear’ have not come true. Foreign investment in UK industry has fallen sharply since the vote to leave in 2016 and Brexit-related falls for the pound could soon translate into higher prices for consumers.

Importantly, the Bank of England has been caught in a Brexit vice since the vote. It has clearly wanted to tighten interest rates but has felt unable to do so because growth has been sluggish and the threat of a shock from a No Deal Brexit has never been far away. As a result, Britain faces entering a global slowdown with less ability to loosen the purse strings than other economies.

Investors should expect volatility in the coming weeks and months, whatever the cause. UK shares appears to have steadied after the large sell-off a week ago but the market appears ready to jump on bad news. It’s a good time to go back to first principles of a diversified portfolio invested according to a level of risk you can cope with, and with an eye on the long term. If you need money tomorrow, it should not be invested in risk assets today.

Those who can let volatility run its course tend to find that it is their friend in the long run. It’s the price we pay for the chance of the higher long-term returns that equity markets have historically delivered over cash.

More on opportunity in uncertain times

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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